Command Economy

Definition, Characteristics, Advantages and Disadvantages, and Examples

By Kimberly Amadeo
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A command economy is where economic decisions are planned out in detail by a central overnment authority. (he plan is implemented
throuh laws; reulations and directives. Businesses follow production and hirin tarets instead of individually and freely respondin to
the laws of supply and demand. Central planners see- to replace the forces that operate in a free mar-et economy; and the customs that
uide a traditional economy; to attain specific societal oals.
(he concept of a command economy was developed by 2iennese economist 0tto Neurath as a method to control thehyperinflation after
7orld 7ar &. (he phrase comes from the German 1Befehlswirtschaft1 and was initially used to describe the Na9i economy. %owever;
centrally planned economies were in existence before then; includin the &ncan empire in <=th century +eru; the /ormons in <>th
century "tah; and even the ".#. durin 7orld 7ar && mobili9ation. ?#ource@ Richard Eric-son and Barry &c-es; Review of Economic
*esin; 1A /odel of RussiaAs 2irtual Economy;1; BCC<; =; <DE3B<F.G
C!aracteristics o, a Command Economy
A modern centrally planned economy can be identified by the followin five characteristics@
<. (he overnment creates a central economic plan for all sectors and reions of the country. &t typically starts with a five3year plan to set
the overridin economic oals. (his is bro-en down into shorter3term plans to convert the oals into actionable ob6ectives. (he oal of
the five3year plan is to enerate robust economic rowth; increase production efficiency and best utili9e scarce resources. )or the most
part; a command economy needs a political system that is also centrally planned.
B. (he overnment allocates all resources accordin to the central plan. (he oal is to use the nationAs capital; labor and natural
resources in the most effective way possible. (his pretty much eliminates unemployment by promisin to use each personAs s-ills and
abilities to their hihest capacity.
4. (he central plan sets the priorities for production of all oods and services. (he oal is to supply enouh food; housin and other
basics to meet the needs of everyone in the country. &n addition; it may have other priorities; such as mobili9in for war or increasin the
nationAs economic rowth.
F. (he overnment owns a monopoly business in industries deemed important to the oals of the economy. (his usually includes finance;
utilities; and automotive. (here is no domestic competition in these industries.
E. (he overnment creates the laws that reulate economic activity. (hese include reulations; directives and wae!price controls to
implement the central plan. ?#ource@ Bon Kristoffer G. Gabnay; Roberto / Remotin; 8r.; Edar Allan /. "y; editors.Economics Its
!once"ts # Princi"les. BCCH. Rex Boo- #tore@ /anilaG
Command Economy Ad-anta#es
Centrally planned economies are reat at mobili9in economic resources Iuic-ly; effectively and on a lare scale. (hey can execute
massive pro6ects; create industrial power and attain imperative social oals. (hey are able to override individual self3interest; and
sub6uate the welfare of the eneral population; to achieve a reater areed3upon oal for the society at lare.
Command economies are also ood at wholly transformin societies to conform to the plannerAs vision; as in #talinist Russia;
/aoist China and CastroAs Cuba. )or example; the command economy in Russia built up an effective military miht and Iuic-ly rebuilt
the economy after 7orld 7ar &&.
Command Economy .isad-anta#es
(his rapid mobili9ation often means command economies mow down other societal needs. )or example; wor-ers are often told what 6obs
they must fulfill and are even discouraed from movin. %owever; people wonAt inore their own needs for lon. (hey often develop a
shadow economy; or blac- mar-et; to buy and sell the thins the command economy isnAt producin. (he efforts of leaders to control this
mar-et can ultimately wea-en support for the central plannin authority.
&nstead of leadin to efficiency; command economies often produce too much of one thin and not enouh of another. (hatAs because itAs
difficult for the central planners to et up3to3date information about consumersA needs. &n addition; prices are set by the central plan; and
so canAt be used to measure or control demand. &nstead; rationin often becomes necessary.
Command economies are not ood at stimulatin innovation. Businesses are focused on followin directives; and are discouraed from
ma-in any autonomous decisions.
Centrally planned economies also have trouble producin the riht exports at lobal mar-et prices. &tAs difficult for the various plannin
sectors to coordinate with each other; not to mention forein countriesA needs.
Command Economy E$ampes
Cuba; North Korea; China; Russia and &ran are the most commonly referenced examples of command economies. RussiaAs Gosplan has
been the most studied. &t was also the lonest runnin; lastin from the <>4Cs until the late <>DCs. ?#ource@ Richard Eric-son and Barry
&c-es; Review of Economic *esin; 1A /odel of RussiaAs 2irtual Economy1; BCC<; =; <DE3B<F.GArticle u"dated A"ril $%& '($)